The articles on this site have often alerted the readers to the hidden dangers of mediation and negotiation clauses in construction contracts. The principle danger is that these sorts of clauses may be unenforceable, for two reasons.

The wording of the particular clause may be drafted in such a way as to create no enforceable agreement to mediate or negotiate.

Or the court may hold that an obligation to negotiate or mediate is too indefinite to enforce as a contractual obligation.

Two recent English decisions hold out the prospect that a clause in an existing contract requiring the parties to mediate or negotiate may be enforceable, at least for some purposes.

“11.1 In case of any dispute or claim arising out of or in connection with or under this LTC … the Parties shall first seek to resolve the dispute or claim by friendly discussion….. If no solution can be arrived at in between the Parties for a continuous period of 4 (four) weeks then the non-defaulting party can invoke the arbitration clause and refer the disputes to arbitration.

11.2 All disputes arising out of or in connection with this LTC shall be finally resolved by arbitration in accordance with the Rules of Arbitration of the International Chamber of Commerce (“ICC”)….

The arbitrators held that clause 11.1 did not contain an enforceable obligation but that if it did, it had been complied with – and that the tribunal therefore had jurisdiction.

Mr. Justice Teare of the English High Court held that the obligation to undertake “friendly discussions” was enforceable. He held that friendly discussions to resolve the claim were “a condition precedent to the right to refer a claim to arbitration.” The clause did not require that those discussions continue for four weeks but that a period of four weeks must elapse from the commencement of friendly discussions before arbitration could be commenced.

Justice Tear distinguished other English cases which have held that an obligation to negotiate is not enforceable. He distinguished the leading English case holding that an agreement to negotiate is not enforceable – Walford v Miles, [1992] 2 AC 128 – on the basis that in that case there was no existing contract with an obligation to negotiate in it. In the present case, the obligation to undertake friendly discussions was in the parties’ binding and enforceable contract. He distinguished SulAmerica v Enesa Engenharis [2012] 1 Lloyd’s Reports 671on the basis that in that case, the obligation was to mediate, not have friendly discussions. In Justice Teare’s view, an obligation to mediate could well be unenforceable if the parties were unable to agree on the identity of the mediator or the mediation process. But he could see no good reason why an obligation in an existing contract to have friendly discussions before arbitration was not enforceable. He summarized his views as follows:

“The agreement is not incomplete; no term is missing. Nor is it uncertain; an obligation to seek to resolve a dispute by friendly discussions in good faith has an identifiable standard, namely, fair, honest and genuine discussions aimed at resolving a dispute. Difficulty of proving a breach in some cases should not be confused with a suggestion that the clause lacks certainty. In the context of a dispute resolution clause pursuant to which the parties have voluntarily accepted a restriction upon their freedom not to negotiate it is not appropriate to suggest that the obligation is inconsistent with the position of a negotiating party. Enforcement of such an agreement when found as part of a dispute resolution clause is in the public interest, first, because commercial men expect the court to enforce obligations which they have freely undertaken and, second, because the object of the agreement is to avoid what might otherwise be an expensive and time consuming arbitration.”

On the facts, he agreed with the arbitrator that such discussions had occurred.

In Garritt-Critchley v Ronnan, the English High court ordered the defendants to pay costs on an indemnity basis when the defendant accepted the claimants’ offer to settle during trial, but the defendant had failed to engage in mediation after repeated offers by the clamant to mediate during the action.

The four day trial took place in January, 2014. After the trial concluded and while judgment was reserved, the defendants sought the claimants’ agreement to accept out of time the claimants’ pre-trial offer to pay £10,000 and all of the claimants’ costs.

The claimants submitted that the court should order costs payable on a full indemnity basis, instead of the standard scale of costs. The court held that the action was based on questions of fact involving credibility and expert evidence and was a “classic matter” for mediation or negotiation. It described the action as follows:

“This was an action of a fairly typical kind where the allegation was whether a binding agreement had been made or not…. this was essentially a question of fact applying well-known contractual principles, in relation to a contract which did not itself require to be in writing. It therefore, was a very fact intensive and evidence intensive exercise where the court would have to judge the credibility of their witnesses and look at the importance or otherwise of contemporaneous documents and the commercial sense or otherwise of each side’s case. That is classically a case where both parties needed to engage in a risk analysis as to whether their side of the coin would be accepted or not…..The second aspect of this claim was that there was an obvious sliding scale of a compensatory award if the claimants succeeded. This was not an all or nothing case on quantum where the parties would have to agree that if liability was established the obvious amount of damages would be X. This was a case where the services of an expert, therefore a matter of opinion, was required, in order to see what the range of awards would be and as was apparent to me in the course of the trial and the points being taken, the range was really very considerable indeed…. That again is a classic matter where mediation should be considered because there is ample room for manoeuvre within the wide range of possible quantum scenarios.”

The defendants submitted two reasons why it had been justified in not mediating, both of which were rejected by the court.

First, the defendants said they reasonably believed that no settlement agreement would be reached. The court said that it was not “realistic for someone in the position of Mr. Ronnan to say that all the odds are so stacked in his favour that there is really no conceivable point in talking about settlement.” Moreover, “if that had been his view then it is surprising that no application for summary judgment was ever made, which it was not. Of course the reason why it was not is because there was evidence going both sides: both sides were relying on documents and the inferences which could or could not be reasonably drawn there from. So to say “extreme confidence”, does not, in my judgment, seem to be a reasonable position to take.”

Second, the court rejected the proposition that the “considerable dislike and mistrust between the parties” was such that mediation was bound to fail. The claimants had been willing to mediate from the beginning, and acrimony is just the sort of barrier to settlement that a skilled mediator can overcome.

Comments

Canadian courts have not yet determined whether an obligation to mediate or negotiate is enforceable. When they do, the decision in Emirates Tradingwill be useful to consider on three points whether the obligation should be enforced. According to the decision in this case, the obligation to mediate or negotiate should be enforced if:

1. The agreement is in an existing and enforceable contract;

2. The obligation is stated in common sense terms that a layman can understand; and

3. The obligation contains a reasonable time period during which it may be carried out, not in the sense that the parties are bound to negotiate throughout that period, but that the period provides them with an opportunity to do so and comes to an end after a defined period so that the parties and the court may know that the period has come to an end.

The decision in Garritt-Critchley is significant for any jurisdiction, like most common law provinces and territories in Canada, which has a loser pay rule in which the court has a discretion to set a higher or lower cost order depending on the parties’ conduct. Under such a rule, the Garritt-Critchley decision says that, in setting the costs to be paid at the end of the proceeding, the court may take into account a party’s failure to negotiate or mediate, in the following circumstances:

The nature of the dispute is such that there was no good reason not to negotiate;

A party’s view that it had a very high probability of winning is no good reason not to negotiate, particularly if that party has not brought a summary judgment motion;

An atmosphere of ill will between the parties or their counsel will not be a reason not to mediate.